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What Are The Elements Of The Innocent Spouse Rule?

How to Get Out of a Joint Tax Debt Using Innocent Spouse

If the IRS had a motto, it would definitely be show me the money. The Service will collect every dollar of tax revenue that it can using any means at its disposal. However, there are always exceptions, and the elements of the innocent spouse rule provide one such exception.

However, much like the offer in compromise program, the innocent spouse rule is not a get-out-of-jail-free card for unpaid taxes. It only applies in specific situations. Furthermore, in addition to the legal elements of the innocent spouse rule, there are significant time constraints. So, if you peruse through this blog and feel that this rule may apply to your situation, contact a tax defense attorney straightaway before the sands in the hourglass run out.

Erroneous Understatement

“Error” implies unintentional mistake. Usually, the IRS considers any understatement less than about 25 percent to be erroneous. Anything larger is fraudulent. This is just a rule of thumb and it is not unusual to see the Service bring fraud charges based on a substantially smaller gap. That’s especially true if there are other badges of fraud, such as omitting sources of income or reporting business transactions in non-business accounts.

The difference between error and fraud could be significant where the elements of the innocent spouse rule are concerned, because the defense may not cover tax fraud. Spouses in these situations may be eligible for equitable relief, which we’ll discuss in a subsequent post.

Furthermore, “understatement” is not the same thing as “nonpayment.” If the return was correct and the responsible spouse did not pay the amount due, the innocent spouse rule does not apply to the amount owing. Once again, the equitable relief defense may be available.

No Actual or Constructive Knowledge

Many innocent spouse cases never make it past this element. In 1998 and again in 2011, the IRS revised some of the elements of the innocent spouse rule and made it somewhat easier to prove. But, these reforms hardly touched the knowledge provision.

Very few cases involve direct knowledge. Instead, to disprove these claims, the IRS usually relies on constructive knowledge. Under current law, would-be innocent spouses essentially have a duty to examine the return and ask questions about any items that seem amiss. In many relationships, that is not a realistic option.

A brief but necessary aside here. If you file for innocent spouse relief, the IRS will always contact the other spouse. If that is an issue because you fear retaliation, we may be able to set up alternative arrangements.

In addition to the fact that some people cannot confront their spouses about financial issues, there are concerns that the law essentially punishes innocent spouses who are well-educated. If this element of the innocent spouse rule precludes you from qualifying, the separate liability election may be available. The relief isn’t quite as complete, but it’s better than nothing.

Speaking of knowledge and the extent of relief, Congress explicitly stated that if you only knew about some of the understatement, you are only liable for that amount.

Fairness

Even spouses who meet the first two prongs of this test may not be eligible for innocent spouse relief, because Section 6015 states that it must be “inequitable to hold the other individual liable for the deficiency in tax for such taxable year attributable to such understatement” after considering all the facts and circumstances. For example, if the judge feels that the innocent spouse benefited from the understatement by living a higher lifestyle, the court may conclude that the innocent spouse must still pay the tax due.

Two Years

The limitations period may be a stumbling block as well, because innocent spouses only have two years after the IRS begins collections activity to file these claims. Lack of knowledge does not extend the deadline, so if the other spouse conceals IRS letters, the two years could very well expire before the innocent spouse knows anything is going on.

In future posts, we’ll go into more detail about the elements of the innocent spouse rule and the alternative relief that may be available.

Venar Ayar, Esq.

Venar Ayar, Esq.

Attorney-at-Law, Master of Laws in Taxation
Principal and founder, Ayar Law

Venar is an award-winning tax attorney ranked as a Top Lawyer in the field of Tax Law. Mr. Ayar has a Master of Laws in Taxation – the highest degree available in tax, held by only a small number of the country’s attorneys.